A home mortgage has two parts: the borrower's promise to repay the lender and a property lien that secures the loan. The lien offers the lender security in that, if a borrower fails to repay a loan, the lender has a right to sell the property for repayment. But this right is waived by a lender who agrees to a short sale.
What's more, a short sale does not necessarily negate the borrower's obligation to repay the lender any remaining mortgage debt. A lender can enforce this "promise to pay" by means of a new note or the collection of any deficiency between a short sale's proceeds and the remaining mortgage obligation following a short sale.
In all cases, a lender must approve a short sale, and that's where the broker price opinion (BPO) comes in.
The Broker Price Opinion
When a real estate broker offers an opinion regarding a property's value based on its qualitative characteristics, that estimate is referred to as a broker price opinion. The BPO represents the broker's opinion, rather than an official appraised value of a property. Consequently, no inference should be made as to a property's market value on the basis of a BPO alone.
A broker's client may seek a BPO when buying or selling a house. For instance, a mortgage lender may request a BPO as an informal precursor to the conduct of an official appraisal, the refinancing of a mortgage or a foreclosure.
Even so, state law may prevent a broker from offering this service and from charging for the issuance of the BPO. Typically, these laws pertain to the provision of the BPO service in certain circumstances.
Read More: How to Calculate the Market Value of a Property
Factors Considered In Creating BPO
When the process is deemed to be a legal one based on state statute, a broker considers multiple factors on his BPO inspection checklist when creating a BPO. For instance, the broker will consider the value of similar houses in the area as well as neighborhood sales. Consequently, the property's location influences the broker's opinion as to its value.
Of equal relevance are the property's current condition and the likely costs of bringing it to a "market-ready" status, which includes the cost of needed repairs. There is no guarantee the BPO will be the same as that of an authorized appraiser who is licensed and recognized by a state regulatory body that governs the appraiser's jurisdiction.
Consequently, the broker's assessment is an unofficial one based on the person's opinion related to the quality of the neighborhood, the status of the real estate market and the home's curb appeal. For a formal appraisal, a licensed professional must conduct an in-person interior and exterior appraisal and, in the process, adhere to state guidelines. For this reason, a broker price opinion is less costly and conducted more quickly than is a formal appraisal.
Bank BPO and Short Sale
The sale of a home for an amount less than the outstanding mortgage principal is known as a "short sale." The difference between the sale price and the principal you owe is a deficiency. For instance, assume you owe $200,000 on your home's mortgage, but you sell the house for $150,000. In this case, the deficiency is $50,000.
A homeowner suffering from financial distress may enter into a short sale and, in so doing, sell the house at a price that's less than the amount they owe on their mortgage. A third party purchases the home and the mortgage lender receives the cash from the short sale. Once the home is sold, "short sale" state law may allow the lender to either obtain a deficiency judgment against the borrower or forgive the difference between the sale's proceeds and outstanding mortgage principal.
Read More: Strategies for Purchasing Short Sale Real Estate
The Lender's Short-Sale Decision Support
Due to the significance of the short sale to the homeowner's credit rating and financial well-being, and to the lender's financial statements, the lender must carefully consider the short sale, or pre-foreclosure sale, option.
One element of the bank's calculation is the status of the mortgaged property and its relative financial value. Also, the lender is required to document or provide evidence that the decision to conduct a short sale of the property is a rational one. The broker price option can serve as decision support for the lender who holds the mortgage and who will approve the short sale.
Any time a lender files a report with a credit agency that a borrower failed to pay mortgage payments as agreed, the borrower's credit rating suffers. But a short sale, which may be approved in part according to a BPO, is less detrimental to the borrower's credit than is a foreclosure.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.